As China Hurts Honda, Stakes in Territorial Dispute Rise

It is one thing to fight for a principle. It is another to bet too much on the fight.

Honda Motor Co. Ltd. (NYSE: HMC) announced that its annual forecasts were too optimistic, particularly because of Japan's territorial dispute with China. Honda dropped its net income estimate for the fiscal year, which ends on March 20, to $4.7 billion from the previous estimate of $5.9 billion. So, more than $1 billion. Added together, the drop across all of Japan's exporters to China must be in the tens of billions of dollars, if the Honda revision is any indication. The standoff between the two Asian nations over the Senkaku Islands will harm Japan's economy much worse than expected. The Japanese government should let the matter go instead of hampering its economy.

There are two primary reasons Japan should relent in the dispute. The first is that the islands are worthless. There may be some oil reserves under the Senkaku Islands, no evidence suggests there is much oil there. None of the islands has inhabitants. And most are nothing more that collections of rocks barely above sea level.

The better way to look at the fight is through the window of Japan's gross domestic product, which was up only 1.4% in the second quarter. This was down from a rate of 5.5% in the quarter before. The hope that the rebuilding of sections of Japan damaged by the huge earthquake would rapidly lift GDP was clearly not a reasonable one. Now that this is evident, the central government needs to move on to other means to stimulate the economy.

In July, the Bank of Japan increased it asset purchase program about 15% to just over $550 billion. But it believes it cannot do much more. Perhaps the organization has come to the same conclusion as most members of the U.S. Federal Reserve. A central bank can only do so much to salvage an economy. Stimulus and policies by the government are the only possible means to dig an economy out of slow growth or a recession.

Abandoning the fight over the Senkaku Islands is such a policy. Japan should adopt it, and not make a very modest issue into one that could ruin the chances for GDP improvement in a country that is already struggling.